Telecommunications Reform: A Year in Review

When the Telecommunications Act passed in February 1996, consumers were promised a new world of communications products and services at lower prices. To deliver on these promises, this landmark piece of legislation proposed to lessen the amount of government regulation in the industry and allow competition to drive down prices and spark innovation. A review of the activities over the past year reveals that, thus far, these promises have not been met. This is not to say things have been quiet. The attorneys and analysts at the Federal Communications Commission (FCC), local and long distance carriers and consumer advocates have been putting in some very long days. It seems that government must get even more involved before it becomes less involved, while phone companies are busy scheming to create a landscape that is favorable for their shareholders. Meanwhile, consumer advocates try to find what is best for the ratepayer in the cacophony of voices in the deregulation movement.

The Federal Communications Commission

The FCC has opened three major proceedings to implement some of the many provisions of the act:

State Agencies

Meanwhile, back in the home territories of many of these powerful companies, state public utilities commissions are taking up provisions of the Telecommunications Act. Ironically, many states, such as California and Illinois, had already begun to reform their rules to prepare for competition in local markets. Upon passage of the act, state activity came to a standstill while states analyzed the impact of the act on their authority. Arguably, the act takes away authority previously exercised by the states. The extremely comprehensive nature of the FCC's Local Competition Order smacks of preemption, which is a major issue in the local carriers' current challenge of the order.

Interconnection Agreements

Despite the unclear mandate from Congress, states have still been busy over the past year. For competition to be effective and avoid the regulatory barrier of extremely costly investment in new networks, new entrants into the local market must set up a business relationship with the local carriers that would allow the two carriers to interconnect. Section 251 of the act requires that incumbent local exchange carriers create these interconnection agreements. As expected, the development of the agreements has been difficult and has proceeded at a slow pace. States have the task of reviewing these agreements and conducting arbitrations between carriers that cannot negotiate agreements among themselves. In a ironic reflection of the distinct lack of market forces within the local telephone industry, very few larger carriers -- such as the long distance companies now beginning local ventures -- have been able to reach agreements with the incumbent local exchange carriers. However, smaller new entrants with much less bargaining power have mainly been accepting the incumbents' terms. States have been scrutinizing these agreements for anti-competitive provisions.

Competitive Checklist

States also have the duty of analyzing whether incumbent local exchange carriers have met a "competitive checklist," as set out in the act, before the carriers can begin to offer service in other markets. The determination of whether a carrier has met the checklist requires extremely careful analysis. The regulators must avoid a situation in which the local exchange carrier is not facing competition in its home market and is able to use that leverage to easily enter other markets, including long distance.

Mergers

The fact that local exchange carriers could offer service in other territories was heralded as a great asset to competition. However, the vision of Bell Atlantic entering a cutthroat competition with Nynex was not to happen. However, perhaps as an intended result, the act allows incumbent local phone companies to merge with each other instead of competing. Both NYNEX and Bell Atlantic have announced plans to merge, in addition to Pacific Telesis and Southern Bell Communications. This ironic result does not bring more competition to consumers, but instead consolidates and eliminates choices. This makes it harder for new entrants to compete and creates a scene reminiscent of pre-1984 Ma Bell.

Delicate Balance

The act does, indeed, force major changes in the telecommunications industry. The question, however, is whether consumers will even notice. If they do, will it be because they benefit from these changes or because they notice higher prices and inferior service? State and federal regulators must create a very delicate balance to bring healthy competition to a highly anti-competitive marketplace. Rules must be relaxed to enhance competitive opportunities, but rules also must be put in place to protect consumers and encourage new entrants. A level playing field will not come naturally to the telecommunications marketplace -- it must be carefully crafted.

Consumer advocates and potential new market entrants have been extremely skeptical of the Telecommunications Act's potential to effect meaningful competition. This past year has been woefully inadequate to judge whether that skepticism was warranted. However, the environment does not look very promising and ratepayers won't have another year to sit back and wait for results. It is now or never for the telecommunications industry.